DealSeekers Limited has a target debt/equity ratio of 0.40, required rate of return on equity of...

 

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DealSeekers Limited has a target debt/equity ratio of 0.40, required rate of return on equity of 15%, and borrows at an interest rate of 9%. It is planning to invest in a new project which is expected to have debt/equity ratio of 0.70. It is expected that starting one year from today sales revenue for the project will be $2,500,000, variable cost $1,000,000, new investment $800,000, and depreciation $800,000 per year in perpetuity. The corporate tax rate is 40%. a. How much is the project worth in unleveraged form? b. If the project had the debt/equity ratio of 0.70, how much would it worth? c. Show that the earnings to shareholders and the required return on equity would justify the market value of the equity of the project. DealSeekers Limited has a target debt/equity ratio of 0.40, required rate of return on equity of 15%, and borrows at an interest rate of 9%. It is planning to invest in a new project which is expected to have debt/equity ratio of 0.70. It is expected that starting one year from today sales revenue for the project will be $2,500,000, variable cost $1,000,000, new investment $800,000, and depreciation $800,000 per year in perpetuity. The corporate tax rate is 40%. a. How much is the project worth in unleveraged form? b. If the project had the debt/equity ratio of 0.70, how much would it worth? c. Show that the earnings to shareholders and the required return on equity would justify the market value of the equity of the project.